Trade Idea: Short Feb/Mar LST/FEI Box

Vincent Wu’s trade idea this week is to short the Feb/Mar LST/FEI (the US and Asian propane benchmarks, respectively).

LST saw strong support into the end of December, particularly on Feb/Mar on the back of rapid inventory draws, leading to its lowest level since July. Meanwhile, Feb/Mar LST/FEI also rose above -$10/mt, its highest level since Q2. According to Onyx data, the market is positioned long and in the money, presenting an opportune time for players to take profit and add shorts to LST.

FEI saw weaker performance but appears to have stabilised now, with expectations of higher Chinese PDH demand for 2024. We’d keep an eye on the Panama Canal, as further adjustment of restrictions in either direction could lift or depress the LST/FEI arb.

As this is a contrarian trade, we recommend setting a tight stop loss at -$7/mt, as a breakout above current resistance levels could trigger further stop outs. Our target price is -$20/mt as we aim to capture the mean reversion should prices retrace to their long-term average levels.